Nuno Limao on the Costs of Trade Wars

Professor Nuno Limao’s recent working paper, titled “Economic and Policy Uncertainty: Export Dynamics and the Value of Agreements” and co-authored with two former University of Maryland graduate students, Jeronimo Carballo and Kyle Handley, was highlighted in articles published by the Washington Post and the Wall Street Journal. The working paper argues that uncertainty about the policy environment may lead firms to decide that the investments required to participate in export markets are too risky to be worthwhile. The authors’ analysis of Census Bureau data indicates that policy uncertainty was an important factor in the sharp reduction in U.S. exports at the start of the Great Recession. As the story in the Washington Post explains, these findings are relevant to thinking about the potential effects of the steel and aluminum import tariffs recently announced by President Trump. To the extent that the imposition of these tariffs raises the risk of a trade war, they can be expected to have a dampening effect on U.S. economic activity, even aside from any effect of the higher prices that may be associated with import limitations.